Sonic Automotive, Inc.
Q2 2013 Earnings Call Transcript

Published: 23 Jul 2013

[Operator:]

Good morning and welcome to the Sonic Automotive Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) As a reminder ladies and gentlemen, this call is being recorded today, Tuesday July 23, 2013. Presentation materials, which management will be reviewing on the conference call can be accessed on the Company’s website at www.sonicautomotive.com then click on the Investor Relations tab under Our Company and choose Webcasts & Presentations on the right side of the page. At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectation about the Company’s products or markets or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the Company’s filings with the Securities and Exchange Commission. Thank you. I would now like to introduce Mr. David Smith, Vice Chairman of Sonic Automotive. Mr. Smith you may begin your conference, sir.

[David Smith:]

Thank you and good morning and welcome to Sonic Automotive’s second quarter 2013 earnings conference call. I'm David Smith, the company’s Vice Chairman. Joining me on the call today is Mr. Heath Byrd, the Company’s CFO; Mr. Jeff Dyke, the Company’s Executive Vice President of Retail Operations; Mr. C. G. Saffer, the Company’s Chief Accounting Officer. I will begin the call with a brief review of the quarter, I will then turn the call over to Heath for a financial recap and then Jeff will give an operational recap. After some closing comments from me, we will open the call for your questions. With that please turn to the slide titled Overall Results. Our revenue was up nearly 4% at 3.8%. New vehicle volume was up 1.7%. Our pre-owned volume was flat, F&I was up 8.6%, Fixed Ops was up 4.5%, SG&A was flat 76.6%; income from continuing operations was $26.4 million for the quarter. Our Q2 EPS was $0.50, up 11.1%. With that I’ll now turn the call over to Heath for more color on our financials.

[Heath R. Byrd:]

Thank you, David. Good morning, everyone. As David mentioned on this slide, on the adjusted results, you can see that revenue is up 4% at $2.2 billion driven by a 5.2% increase in new and a 4% increase in fixed, 8.6% increase in F&I. This growth in revenue resulted in gross profit of $324 million, an increase of 4%, adjusted diluted EPS from continued Ops of $0.50 up 11%. Next slide please. SG&A, Q2 SG&A was flat compared to last year; increases in advertising and variable compensation were offset by the reductions in rent. As I mentioned in Q1 call, 2013 SG&A will include incremental expenses related to strengthening our internal controls of financial reporting as it relates to compliance with SOX. Total spend [unit day] [ph] is at $1.8 million. SG&A also includes IT expense for development and ongoing support of business application to enable our customer experience launch in mid 2014, this totals $3.7 million year-to-date. [Inaudible] excluding these items is at 37% . We are still targeting to be at below 77% for the year in line with our internal forecast. Next slide. CapEx, total CapEx year-to-date stands at $89 million which included the acquisition of four properties in Q1. With mortgage offsets, total cash used was $63 million. Estimates for the year remain the same at $67 million for real estate and a $105 million for facilities, store level CapEx and IT spend. Next slide please. Debt maturities, as reported in May we took out a 9% notes with bond offering of $300 million at 5%. This is obviously a very successful offering for us and resulted in pushing out our maturity to 2023 moving our average coupon rate down to 5.8% and providing an annual cash interest savings of $3.9 million. Next slide please. Debt covenants, this slide shows you that we’re compliant with all covenants at the end of Q2 and we expect to be compliant going forward. Next slide please. Share repurchases, on this slide, you can see our share repurchase activity year-to-date at 627,000 shares and we have an additional authorization of $135 million. So overall, very productive quarter with double digit growth in EPS, staying true to our strategy we will continue our focus on investing in the core business, [owning our own] [ph] properties and improving the capital structure. Based on year-to-date results and our internal forecast, we are reaffirming our EPS guidance of a $1.93 to $2.03. With that I’ll turn the call over to Jeff Dyke.

[Jeff Dyke:]

Thanks Heath and good morning everyone. I appreciate the opportunity to provide color on the Q2 2013 Sonic operating results. Q2 new car revenue was up 5.1%, with volume up 2% for the quarter, as you’re aware we’re in the middle of training our True Price model to support our customer experience process being rolled out next year in July. This change has created some opportunity to both volumes and [PUR] [ph] as our team gets used to selling in this new environment. We’re very pleased with where we are at this point in the year, and saw improvement throughout the quarter as our training and focus on execution took hold. And we’ve stores within each brand group that are delivering volume and [PUR] [ph] numbers that are extraordinary and our customer base loves it, as a matter of fact, we had our high CSI quarter in company history last quarter. It is just a matter of time until our entire team catches on to this critical part of our customer experience process that we will roll out again next year. We expect to continue to improve as the second half of the year progresses; we ended with a 53 day supply. Next slide please. Well, our pre-owned margins are improving and we were at 89 units per store per month, we’re transitioning in pre-owned as well to our True Price selling process which just as new created some opportunities for our team. We will see continued improvement in pre-owned as the team becomes more comfortable with the process. Again, we had about two-thirds of the company in great shape on volume and [PUR] [ph] as the training and consistency of execution begins to take hold. I fully expect our team to continue and to improve as the second half of the year progresses and we fully execute True Price in preparation for customer experience rollout again next July. We ended the quarter with a 29 day supply on the ground as we continue to grow in managing our inventory [appraisals and] [ph] pricing from our centralized retail trade center. Next slide please. Both revenue and gross profit grew 4% and 4.5% for fixed operations respectively in the second quarter, we had the same number of selling days year-over-year for Q2 and we’re pleased with our fixed operations execution. Customer pay gross was up 3% while warranty was up 19% which was nice to have, but it’s over a small warranty base and still represents about 15% of our overall revenue, up slightly over last year. Our service iPads are now 100% rolled out to the stores in the next phase of preparing for our customer experience process rollout [in store] [ph] next July, we will focus on rolling out iPads and application technologies for our technicians. Before I turn the call back over to David, I want to take the time to thank our incredible team for all their hard work and dedication to creating one of America’s greatest companies to work and shop. I also want to thank them for the fantastic effort they’re putting forth as we revolutionize the way customers both shop and service at Sonic Automotive. With that I’ll turn the call back to our Vice Chairman, Mr. David Smith.

[David Smith:]

Thank you, JD. Q2 was a busy quarter for us, financially second quarter was our 15th consecutive quarter that’s nearly four years of quarter-over-quarter revenue growth without any acquisitions. We had double digit EPS growth of 11%, we announced our fist acquisition since 2007 with Murray Mercedes-Benz at Denver and Murray BMW at Denver which we will close on this in the third quarter. We strengthened our balance sheet by taking our 9% notes and issuing $300 million 5% notes. I believe that it is important to reiterate our investment principles as Heath noted on earlier in call, we will continue to invest our base business, owning our real estate and strengthening our balance sheet. Operationally, we continue to focus on True Price as JD noted. In addition, over the next 18 months we will be rolling our Sonic customer experience as we move closer to branding. We believe that our Sonic customer experience will position us with a competitive advantage. The business environment continues to be favorable therefore we’re maintaining our full year earnings guidance of a $1.93 to $2.03 EPS. Before we open the call to take your questions, I would like to thank our Sonic associates, and our manufacture and vendor partners for making Sonic Automotive one of America's greatest companies to work and shop. With that we'll now take your questions.

[Operator:]

(Operator instructions) Our first question comes from Rick Nelson of Stephens.

[David Smith:]

Hello Rick.

[Rick Nelson:]

[Inaudible] of unit sales which seemed to have lagged the overall market as well as the margin pressure and then how True Price impacted [to have that result] [ph] and I guess, why same things are going to get better from a market share standpoint and a margin standpoint?

[Jeff Dyke:]

Rick, this is Jeff Dyke. Look this True Price strategy that were put in place which is one step closer to being a one price company really is a change in the environment in the store and it’s really important for us, next year when we roll out customer experience so that we can accomplish all of our customer experience processes. It has caused problems, but it’s only in about a third of our stores, it’s just getting around and getting them trained and it’s hurt us both on a [PUR] [ph] and a volume basis and we’ve got stores where, in fact, we have got BMW and Honda stores where we’re seeing 120% growth and just fine on [PUR] [ph] and yet then we’ve got a couple of others that just hadn’t quite caught on to the selling process, it’s just not easy and anybody who has been through that in a conversion like this understands that. So, the good news is, May was a little better than April, June was a little better than May and July who knows, we’re really off to a great start in July, we’re on record pace in the used car department for volume with stronger grosses. So, we will see, it is just a very difficult transition, but one that is critical for us to be able to, as David said earlier for us to able to brand and for us to be able to have our customer experience process put in place. We got a sales process that’s going to allow our sales associates that we talked about in the last call to sell the car entirely; they will do appraisal, they will do the F&I, they will do the desking themselves and it will be paperless. So, this entire process, you’ve got, you can’t have all the negotiation going back and forth, you got to get the price right. And, we’re working very hard to make that happen. Quite honestly, we’re very, very pleased with where we are at this point. We built that into our forecast models, we knew that we would have struggles with it and that’s why we’re reaffirming our guidance; we’re right in line where we thought we would be internally.

[Heath Byrd:]

And we’re seeing our highest customer satisfaction scores in five years.

[David Smith:]

Yeah, our customer satisfaction scores are off the chart, so customers love it because you don’t have to go back and forth and do all the typical waste of time, non-transparent processes and we could not do any of this and have higher volume and have higher margin, but in the long run, if you take a three, four year look at this, this is going to really revolutionize the way we’re selling cars and make a big difference for us and we believe give us the competitive advantage.

[Rick Nelson:]

Have you changed the rollout plan for True Price as you go back and train the [part] [ph] of the store base where it’s at?

[Jeff Dyke:]

We’re 100% rolled out on True Price, I think we’ve got every store but two done and now it’s going back, and going back, and going back you can imagine how much time we’re spending teaching the environment how to not negotiate. If you’re pricing one way and the next day you start pricing a different way and your teams used to negotiating and negotiating $1,000, $1,500 a car and now we want them to negotiate less than $300 a car and eventually nothing, this is a big step and we think it’s a step in a right direction, but it certainly cost us some opportunities. But, nothing that, we’ve had no surprises, we had nothing that we did not expect. In my career, I have been through this before and this is just something that goes that comes along with doing something like this, it’s not easy. It’s not easy to do it, it’s heavy lifting but in the end it’s going to be a big difference maker for us.

[Rick Nelson:]

Is this something Jeff that you tested before you rolled it out to the chain and is that working better in some segments of the market, like luxury than in the mid line [imported] [ph] domestic side?

[Jeff Dyke:]

Yeah, it’s a great question. We did, we tested it in Honda and we tested it in BMW, it’s working exceptionally well in our BMW stores, we’ve got two or three that are still catching on. And for two years, the last two years we have been testing it in Honda and we were, the last two years in a row, I think we are the fastest growing Honda public company out and we were the fastest growing Honda company out there in terms of percentage growth and we’re learning a lot from that rollout and we have made adjustments to it. We were learning how to handle margin and the negotiation piece, there is just a whole lot of issues that come along with it once you put it in place. Every brands are a little different, every markets are a little different, but we’re going to have that pricing consistency across all of our stores. We also [inaudible], it’s been a lot easier on pre-owned because we have the pricing models already built, the new car pricing models are under construction now and that’s part of the analytics spend that Heath talked about. And that will be ready at the beginning of next year, so it will make it a lot easier right now, we’re doing a lot of heavy lifting from a new car pricing perspective but our analytics tools and I have seen just some renditions are really, really good, in another few months we will start testing and then roll those out and make it a lot easier for our team to price inventory.

[Rick Nelson:]

Got you, thanks a lot and good luck.

[David Smith:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Brett Hoselton of KeyBanc.

[Brett Hoselton:]

Good morning.

[David Smith:]

Good morning.

[Brett Hoselton:]

Can you talk about the progression through the remainder of the year and into next year of the expenses associated with these initiatives?

[Heath R. Byrd:]

Yeah, sure, this is Heath. Yes, how are you? As I indicated we spent 3.7 year-to-date that’s rolling through the SG&A and we’re going to spend again $7 million for the year that will continue to run through the SG&A in 2013 and 2014. On the capital side, we’ve got $7 million in CapEx that’s related to the development of business applications, analytics like Jeff mentioned and that’s the number we’re going to start seeing come down, there’s going to be less and less capital spend as we move into 2014, 2015, 2016 and by the year 2016 we’re estimating more than $2.5 million capital spend for enhancements to these tools. Now, in the SG&A there will be some reduction as it relates to development but a lot of that expense will continue to run through the SG&A as we support the applications that we’re building. But now, the other piece is running through SG&A that will dissipate and be gone by the end of the year is this [SAS] [ph] remediation expense, we’ve spent $1.8 million year-to-date in that category and we expect to spend $3 million to $4 million this year. Once we put in the new designs of controls, implement the controls that will start going away and we will get down to more like $1 million reoccurring.

[Brett Hoselton:]

And kind of from a conceptual standpoint taking a long step back, follow on with Rick’s question basically is, as we look through the history of the automotive industry, we see a number of different attempts at one price selling whether it be Saturn, Oldsmobile from an industry standpoint or whether it be individual dealers to dealership groups, as you kind of think about your True Price strategy which seems similar to a one price strategy, how do you see your strategy possibly differing from somebody’s previous strategies such that you think that you’re going to be successful in implementing this?

[Jeff Dyke:]

Well, one, I mean there are a couple of things here, I think if you look at one of the most successful companies out there, [inaudible] market cap size, CarMax is just a huge company and they are all one price, maybe one high price, but they’re one price and it’s just a significantly different day and time than what Saturn and Oldsmobile and all these guys went through. The technology that’s there today, the consumer has changed 180 degrees, and if you just spend any time in the stores and what the processes that we have versus what we’ve had and the amount of time it’s going to take, I mean, once you make a decision on buying a vehicle, the car that you want and our goal, we’re going to have you in and out of there in less than 45 minutes depending on the amount of time you want to spend with us and that includes no paperwork, that includes not having to go back and forth to the desk, on average across the industry that’s happening two and a half times there is just no comparison. And for us, we believe that the consumer says and we see it in all of our numbers, we see in our customer satisfaction scores that the consumer says, look I would like to come into your store, I would like to pay a fair price and I would like to get out of there, I don’t want to spend three and a half hours to buy the car for me. I know the information that I need before, long before I get there because of the digital age and the information that we provide. And, it’s just a totally different package, we were a 100% confident that what we’re doing, where we’re headed is going to provide us a competitive advantage, it’s just not easy to get there. We’ve got people in our organization being selling cars one way for the last couple of decades and the consumers wanting it changed, we’ve seen it, we’ve practice it in different stores, we tested it and there is just no question it’s a much simpler, much easier process, but it takes a lot of heavy lifting to get there in terms of changing the culture and getting the right people to support. What we’re trying to do is just not easy.

[David Smith:]

I would like to reiterate, the biggest difference between Oroville (Ph) and Saturn in today’s world is the digital age, the pricing information is so transparent and that didn’t exist when they attempted to think strategy.

[Brett Hoselton:]

And then, how do we think about this then evolving into or let’s say dovetailing into the customer experience how do you see the customer experience that you’re planning to implement that strategy, how does that relate and work with the current strategy that you’re implementing here as far as the True Price strategy?

[Jeff Dyke:]

Well, in order to have the customer experience process that we want you got to take the back and forth negotiation out of the process that’s got to come out because that part is, if you talk to the customers and survey them that’s the part that they hate the most, they don’t trust, there is no transparency and it takes the most time. And whether it’s on the trade or on the car that they’re purchasing, so all of that has to be eliminated in order to accomplish the goal of having the customer come in to a retail environment or a specialty retail environment and enjoy the shopping process. Right now, just think about the last time you bought a car, talk to anybody that come in and go out of the store, they love that maybe they’re individual but they are working with, but the entire overall process is not something that consumer bases and love with in our industry and that’s got to change, well, in Sonic it’s going to change. And that all dovetails together, if you cannot price your car right at the first time and the process won’t work, the customer experience process is not going to work because you’re going to have all of this back and forth negotiation. There is too much information in the consumers hand today and it’s going to be even more five years from now, the consumer is going to walk up and say, look there will be an application for it, say the last 15 Volkswagen was soft in this market, in Houston Texas and the zip code sold for $23,500 and I’m not going to pay any more than that. That data you got to be able to use to your advantage and I am not telling you that we have to be the lowest price, but I am also telling you we have to have a fair price and when you provide a great experience I think we all know that a great experience allows for a higher margin and that’s what we are saying, our stores that are really doing a great job, our margins are pulling up above what we have been averaging and that makes the big difference, it’s just there is a lot of heavy lifting that goes on between starting with a sale on day one and teaching them, moving from the negotiate environment into an environment that encompasses our full customer experience and it’s a big transition but one that we’re heavily committed to and we have been working on for the last three or four years this is all bits and pieces and steps that we’re taking to get to this point where we will start rolling out next July.

[Brett Hoselton:]

Very good, thank you very much gentlemen.

[David Smith:]

Thank you.

[Operator:]

Thank you. Our next question comes from John Murphy of Bank of America/Merrill Lynch.

[David Smith:]

Hi, John.

[John Murphy:]

Just to have a first question on slide 11. As we look at the average selling price it’s up more than a 11 hundred bucks and if you were just to look it that alone you would assume that the grosses would go up in absolute terms on a dollar basis and they’re actually about a 100 bucks and we have seen this at a number of other dealers and I am just trying to really understand what’s going on here because obviously, auto makers are making more money, the ATPs are going up with them, your selling price is going up, but the absolute gross is coming down. I mean, I can understand if the dollars gross would stand flat and that percentage was coming down, but we have now the percentage and the dollar bases coming down, is there something that’s going on here in your relationship with the auto makers or in the markets that it’s driving this, just seems kind of odd?

[Jeff Dyke:]

Now John, this is just a mix issue, right. You got two price going on with us, but from an industry perspective you’re looking at Sonic, when Honda becomes a larger percentage of your overall mix or Toyota becomes a larger percentage of your overall mix, your PUR is going to change. I can up write the selling price quarter after quarter after quarter that PUR number is just not the big focus point. I can sell used cars at $1,400 a copy and I know and I am selling about 90 cars a month, right. You take my 90 cars times $1,400 that’s generating $125,000 to $130,000 in gross where I got a competitor who is selling 73 cars a month at $1,600 a copy and that’s generating a $118,000 a month gross per store for them which would you better have and it’s the elasticity of that PUR that you really have a lot of attention to. And we talk about that a lot in these calls and I haven’t just quite gotten everybody to think that way, but we do here at Sonic, we really watch that PUR number if you sell more cars at $1,000 a copy then you do BMWs at $3,000 a copy and one quarter versus another your overall average PUR is going to come down.

[John Murphy:]

But, something is odd in a business where the volume is up and the selling price is up, but the gross profit is down in absolute terms in total, that’s an odd thing, I understand what you’re saying as far as your elasticity and that if you run the load margin and profit maximization equation if you drop your marginal profit, you drive your total profit higher that to a good business decision. But, when you absolute gross profit is down from $69 million to $67 million that’s odd.

[Jeff Dyke:]

But, it’s not odd for us because of the True Price process, I mean, our margins have been squeezed in both new and I mean, used don’t pay attention to right now, but in this conversation from a new car perspective our margins have definitely been squeezed from a True Price perspective. It’s been a challenge and about a third of our stores we’ve got 25 to 30 stores that are still learning how to handle this process and when you have a BMW store that was making $3,500 in gross and you’re making $3,000 in gross now or $2,800 in gross that’s going to affect your margin and provide for higher selling price, right. And so that there is just a little bit of a shift that we’re going through because of our True Price, if you would have just removed that process for a second, mix this is what driving that in my definition across all the dealer.

[John Murphy:]

Okay. And then, just a second question on SG&A at 77%, I mean if you guys, have you guys an ex-rent or rent adjustment to understand what that is ex-rent so we could kind of compare it to other companies and we’ve heard a lot of other companies are operating in the mid 60 to high 60 range SG&A grows ex-rent, do you have an adjusted number?

[Heath R. Byrd:]

Yeah, you can confirm that I think 71% less rent.

[David Smith:]

Hang on, we will give you a number here one sec. Yeah, 71%.

[John Murphy:]

And you think, as you target everything that you’re working on here and you got a lot of moving parts, I mean, is that kind of the thing, the number that you think could get, could be a few 100 basis points lower as you get leverages you worked through, everything that you’re working on right now in the markets recovers, is that realistic?

[Jeff Dyke:]

It is, there is just two things here, number one again, we’ve got that of course had incremental spend related to socks that’s driving part of that SG&A, but the strategy of building the technology, the leverage needs to come on top line, like I said, there is going to be some expenses that continue to support those business applications that support the customer experience and your leverage should be coming on top line by generating more gross. So, the biggest reduction is going to be with that socks going away in 2014 and then you’re going to have maybe 20% reduction in your IT spend that’s fully with the development.

[David Smith:]

John, you recognize I mean, you look at from top line growth we got stores that have gone from selling 100, 120, 130 pre-owned cars to 300, to 280 as this process has come to life. We’re not talking about small steps here and that’s what happens when you start spreading it out across this entire organization unless they were talking about. We had years and years of growth of 20% and 25% growth on pre-owned volume and that sort of, tiny there with this True Price process, and as I did that leverage in the store and I did those guys understand and how to execute in this environment if there is whole another gear that we get here and I see it happening in some stores and others not and it’s just a training process that we’re going through and it’s going to take us a little bit of time, but we will continue to improve as the year and next year go along.

[John Murphy:]

That’s very helpful. And then, just lastly, it’s a great capital market to move, you guys made with the debt maturities really great stuff and great timing. Is there anything else that you see out there that you might be able to deal due to bolster your capital and maybe set up acquisitions or other actions in the future that you might take, it just seems like this was such a great move, there might be other opportunities.

[Jeff Dyke:]

We think and guess that sometimes and we should have gone for more, but the reality is, we’re going to always look at certain plans and see how the yield is in high yield market and monitor those to see if there are other opportunities. There is also, as we look acquisitions of course, Murray deal closing in Q3, but we do look at using our capital as you always know in doing the base business, owning own property of that Murray acquisition and potentially looking at taking out some of our debt in the public markets, opportunistically as we know the yields are going up that make opportunity for us as well as, opportunistically share repurchases. We’re looking at just in a revolver as well to increase our borrowing base, so those are some of the things in the capital plan.

[John Murphy:]

Great, thank you very much.

[David Smith:]

Thank you.

[Operator:]

Our next question comes from Bill Armstrong of CL King & Associates.

[Bill Armstrong:]

Good morning. Your warranty gross profit was up about 19% what were the major drivers there?

[Jeff Dyke:]

The recalls, Panda had a recall, BMW had a recall that’s what driving that and those are onetime Bill, they come and they go, right. They are onetime blitz it still represents about 15% of our overall fixed operations revenue and I think last year it was 14.5% or something like that so it’s not a big portion of our overall mix. We have a, when you look at our fixed operations business you look at the gross that we generate, we have a really mature fixed operations team and performance and so, we’re very pleased with the 4% and 4.5% gross we saw in revenue and gross profit in this category. Still opportunities on the customer pay side, especially and internally is our used car business begins to grow again once True Price is laid in and that will help us grow from a gross perspective.

[Bill Armstrong:]

Got it. Maybe looking at the True Price from perspective, I’m trying to put myself in the shoes of a salesman or sales manager in one of your stores, what are my challenges then in adapting to this new True Price system, what would my major challenges be, what’s the process that I have to go through to just doing business.

[Jeff Dyke:]

I mean, the biggest one is, we trained the American consumer to come in and negotiate buying a car. And, when I need $500 off of this number we don’t the room to negotiate $500 anymore and I have still got some stores that are still doing it and so we’re training and working and training and working to teach them how to overcome that. Then it’s okay to have leave the store in order to stick to your strategy and we’ve got stores right now that are doing that and doing a great job and we have the growth, we have the march and we have everything we need in it and that fills trusts and transparency with the consumer and that’s something that in our industry I don’t care who you talk to, you do your surveys that just doesn’t exist. It’s very, very difficult to find places where people point to you and say, I trust that they’re very transparent and how they build their business model. And we’re making that come to life here at this company, but it is not easy to do and I think if it was easy everybody would be doing it, we’re another six, seven months away from we feeling really, really comfortable where we are and getting a few of our guys that are still learning on board.

[Bill Armstrong:]

So, customer walks of your store because he is not getting that $500 or $700 off that he wants, you’re only giving him $300 maybe, is he finding a better deal at a competitor or might he actually end up coming back and saying, hey, that the price you offered me actually was a good price?

[Jeff Dyke:]

You can always find a better deal, I mean, it is the car salesman selling it, I know, $300, $200 off is a better deal, if you experience that they’re going to be able to find, where else do they go to find a sales associate that’s trained, iPad in hand, they can do the entire transaction right there and you can put your finger, your index finger on the iPad sign and you’re done. And then, be gone once you made the decision in 45 minutes. There is no other price that comes even close to being able to do that and that’s what going to come polite at Sonic in the next 12 months. We have been investing and working on this process for four years now, and we talked to you guys about playbook introduction, we talked to you about pay plan changes, we’re doing all of these things methodically to get to this point. And once you get to that point, I have got consistency across all the stores, I have got the technology in the stores, the processes both from the sales and service perspective then I can hang my name on my building, we can Sonic Automotive up here and begin to brand this company and show the world, introduce the world the Sonic and how we do things differently. This is something that’s been in the world, this company for a long, long time and we’re really of course to be able to introduce it. But, we knew going into this year, I come from a one price environment, I tried to convert to one price environment and another life and I understand it’s a very, very difficult transition that’s why we’re taking a step. And that step for us is our True Price strategy which allows ourselves to little room, but not enough that can hang us and we’ve got some stores out there that just simply hadn’t quite got on yet. It may will, but they will come to the party and we will sell more cars because of it and we will make higher than traditional margins because of it.

[Bill Armstrong:]

It does sounds for called in. And is there any way that you can kind of educate the consumer about this new pricing approach, maybe doing that driver causing or other methods so there may be more prepared coming for this new different kind of experience?

[David Smith:]

Yeah, we will, when we rollout our customer experience process which is two types the part of it that’s not the whole processes, when we roll all that out it will have, we’re budging for a very big national branding campaign that shows what the experience is all about and how about its going to work and that will sometime the second half of next year. What I don’t want to is start advertising that, as you can imagine, I have got a city, I have got 15 stores in the city, I got 10 stores that are doing great, 5 stores aren’t doing it well, and one customer goes through and relate one store to another, if you’re executing properly this is a bad scenario. So, I don’t want to go advertise something that I am not good at yet. And, we’re becoming good at, we’re getting better and better as we move along, but boy, it’s been a challenge and had we not seen the cadence January to February, February to March, March to April, April to May, May to June and now July we’re getting stronger and stronger as we go along. But, it’s been a heck of a tough assignment and we’re getting it done. You’ll see as time goes on and progresses the consumer they don’t want to go through all that only. But they want -- they want to trust you and they want transparency, all of our surveys that we’ve done in large searches and surveys that we’ve done a lot of our customers those are the two biggest things that pop up is trust and transparency and we’re going to give it to them.

[Bill Armstrong:]

Great, okay, thanks. Thanks a lot for that color.

[Jeff Dyke:]

Yeah.

[Operator:]

Our next question comes from Scott Stember of Sidoti & Company.

[Jeff Dyke:]

Hey Scott.

[Scott Stember:]

Just talk about on the used side how SIMS is operating for you in the retail trade center and whether or not you’re still learning curve there that has may be impacted sales?

[David Smith:]

First of all, SIMS right now is running as good as it’s ever run. Our trade center is running great, our trade ratio at this company went from the high 30% range to now over 55% and is high as 58%. One of the thing that I did, we’ve been running our day supply is a little wide and one of the things that we started the quarter off online is about 7,500 cars and we’re selling 9,000. So, when you look back and you say, well my margins are okay, they’re not horrible and I’ve got 7,500 cars online and I’m selling 9,000 I’m doing a really good job, I need more cars online. So, we increased our inventory by about 1,100 cars to begin the third quarter of July and right now we’re tracking to have the single largest used car market in our company’s history. And so, I feel real good about where we are from an inventory perspective and then when you got True Price which we’ve been doing a little bit more on the used car side then we’ve been because we’ve been pricing since January or you’re going to little bit before that some of our stores, we’ve been pricing centrally. It has slowed us down a little bit there but I think the inventory, the lack of inventory has bought us down little more than True Price on the pre-owned side. It’s certainly picking up in July and we will see how it goes for the rest of the year. It’s not question about battling the same issues we already knew, but I just don’t think greater than extent. True car sales in our retail trade centre are well ahead of where I thought they would be at this point in time and we’re very directly there.

[Scott Stember:]

Right, I understand. On the parts of service side can you just talk about what you’re seeing you know the theme of more cars on the road in the coming quarters and the coming years and the potential impact that‘ll have on your customer pay and warranty business and if you are seeing any of that currently?

[David Smith:]

Yeah, I mean, there’s obviously there’s some warranty business out there, it’s not something that we budge it for to count on. You know it’s going to run between 30.5% and 15% of our revenue and that’s, that’s kind of where it is. There are certainly upside opportunities from a customer’s pay perspective and from an internal perspective, so it’s specially as we get customer experience rolled out , we got a process with iPads and our technicians communicating directly with our customers, pictures worth of 1,000 words you can imagine a car on a lift, a technician taking pictures of the cars and communicating directly and creating a relationship with our customer and we’re going to roll out a new CRM tool next year, we start that in process this year and that’s part of the IT spend and that CRM team will help us keep a customer with the technicians and sort of that going -- that for customer going through rotation and ending up with just any technician we’re trying to create that relationship between technician and customer and we’ve got some really need things are happening there so yeah there’s plenty of upside, not just internal upside there’s plenty of customer pay upside there we see you know this year and in the coming years.

[C. G. Saffer:]

Scott, this is C.G, that is the most asked question after, when are we going to see that lift, we haven’t necessarily budgeted anything in the last half of this year, but probably we see some list coming into 2014, we may push that into some of our estimates for the 2014 New Year, 2014 year, but we haven’t seen kind of that way that everyone is expecting, yeah, so we’re cautiously optimistically will begin in early 2014.

[Scott Stember:]

Great and the last question, could you just tell me how much of your real estate you own currently?

[David Smith:]

We own about 30% of our real estate now projected to be up to 44% by 2017.

[Scott Stember:]

Great.

[David Smith:]

They found in the least terms.

[Scott Stember:]

Got you. That’s all I have. Thank you.

[David Smith:]

Thanks Scott.

[Operator:]

Our next question comes from Bret Jordon of BB&T Capital Markets.

[Bret Jordon:]

Just a quick question, I guess trying to understand more about this one third of the store base is underperforming on True Price, is there a, I guess is there a common denominator or they and the question is asked as early as your particular vehicle line is it a lower price point unit, but I don’t understand why a third of the consumers are walking and wanting negotiate and being upset that they can't and walking out, well two thirds are posting that high score and what trying to understand what’s wrong with this one third of the base?

[Jeff Dyke:]

Yeah, Bret now this is Jeff talking and that it don’t have anything to with the consumers, it has to do with us and our ability to execute and getting culture right in the store and it is not -- if there was one common denominator it would have been fixed, it’s just heavy lifting, you just got stores being doing business one way for so long and to walk-in one day and change all that in some cases it’s difficult. And I’m not saying that it’s a smaller store or we’ve got some of our bigger better stores that have struggled with the transition and we’ve got some stores that were smaller now become bigger stores because we’ve put the transition in. So, there’s no common denominator there it is just time, it takes time to execute this process and it’s just a big step for us, it’s a big culture change and I wish there was a button I could push and say okay this is what we’re going to do today, but register some work that way. There’s a big adjustment that we’re going through and we got about two thirds of our store on board and running in the right direction, delivering both on a volume and margin perspective higher than, than what we anticipated and about a third of them, and maybe about 30 stores we adopted that and some are doing a little better than others we’re just not done with yet. And we got training and focus on them and they’re continuing to get better if you’d ask me this in April, I’d told you there were 50 stores out there that were doing that so it’s a progression that we got to go through.

[Bret Jordon:]

And is this for the customers aren’t walking in the door because it’s not being locally promoted correctly or is it the customers are walking in the door and they’re not being converted to purchase because the experience I have once again with this salesman is not working?

[Jeff Dyke:]

Yeah, we’re not advertizing this at all, right? It would be foolish to advertize it because there’s no consistency across the stores yet, so we’re still learning that and there’s no, again I may go back to it’s a training opportunity for us and an execution opportunity, there’s no customers sort of coming in and leaving, they’re customers that we have in stores that are exceeding our expectations and might come and leave and then come back but until you combine the True Price pricing methodology with the customer experience and we’re going to rollout next year all of that is meant to fit together in a puzzle, but had to be rolled out in bits and pieces when the pricing piece was the only one to get started with because we knew it’s going be the one that was going to cause us the most trouble, the biggest opportunity for us, it would be the hardest to execute.

[Bret Jordon:]

Okay, all right. Thank you.

[Operator:]

Our next question comes from Ravi Shanker of Morgan Stanley.

[Ravi Shanker:]

Thanks, good morning everyone. Hey so, you restated your number last year and your SG&A improved significantly assuming that’s because you got rid of a really, really underperforming store and if that is the case, how many of more such stores do you think you have where you can get on kind of just improve your SG&A in one shot?

[David Smith:]

I guess, you’re talking about the best of Oklahoma.

[Ravi Shanker:]

Yep.

[Jeff Dyke:]

Yeah, okay. The numbers are recast so it’s an apple to apple comparison in the P&L that you’re seeing or from the standpoint of additional stores disposing off, there aren’t any current plans.

[David Smith:]

So, we’ve no plans to dispose off any stores.

[Ravi Shanker:]

Okay, but do you see any scope for or any store there were kind of underperforming at that same level where you have like big chunks of improvement?

[David Smith:]

Not even, not even close.

[Heath R. Byrd:]

Oklahoma was very unique situation.

[Ravi Shanker:]

Okay, understood. And also just on F&I we’re hearing from some other dealers that they’re seeing some signs of this that the CSPB rules are starting to cause a change in behaviors at some banks are you guys seeing anything at your end?

[Heath R. Byrd:]

No, this is Heath, we haven’t seen any of our preferred vendors change there, procedures or rules at all, you would get this question at every investor meeting we have as well and the bureau has been little more active, we saw back in June they had this procedure rolling where they now have jurisdiction over non-banks and that’s the little concerning but, we’ve got capitals in place for years, we’ve procedures in place to ensure against discriminations and so we don’t do it as a large risk and even if you go to the flat rates we think that we can live in that environment as well, we have a couple that have flat rates now. So, for us this business is usual until something dramatic happens, we don’t view it as a huge risk.

[Ravi Shanker:]

Okay. Thank you.

[David Smith:]

Thank you, Ravi.

[Operator:]

(Operator Instructions) Our next question comes from Jordan Hymowitz of Philadelphia Financial.

[Jordan Hymowitz:]

The most of my questions being answered just one quick follow up to Ravi’s question. So, you’re saying that not a single vendor that you do business with as low as their yield spread participation that give you guys since the CFPB has started investing it?

[Jeff Dyke:]

There’s now been, one of our preferred vendors has changed their procedures now, we in fact, I questioned our director of that area just last night to see if there’s any update and there’s been no change.

[Jordan Hymowitz:]

And I’m sorry just when you say preferred vendor how many names should be on the preferred vendor list?

[David Smith:]

Josh, yeah 12 to 15.

[Jordan Hymowitz:]

Okay. So, I have some smaller banks that you may not do business may have changed from none of the 12 to 15 that your primary vendors have changed?

[David Smith:]

That’s correct.

[Jordan Hymowitz:]

Okay. Thank you.

[David Smith:]

Thank you, Jordon.

[Operator:]

At this time there are no further questions.

[David Smith:]

Thank you. Thank you everyone, I appreciate it.

[Operator:]

Thank you, this concludes today’s conference call, you may now disconnect.